EU Blindsided by Latest Tariff Threat
Having announced over the weekend a 30% “reciprocal” tariff from August 1 on EU exports to the U.S., the EU seems to be a state of somewhat shock, wary that months of negotiations have failed, let alone succeeded in reducing the tariff threat from the original 20%. In response, European Commission President Ursula von der Leyen has said that rather than hitting EUR 21bn of annual US imports with counter-tariffs tomorrow used a statement that they would be delayed but she now has just 18 days to avoid European exporters suffering a 30% tariff that would be very damaging to the EU’s economy. To date, EU trade negotiations with the U.S. have been led by Maroš Šefčovič, the Commissioner for Trade and Economic Security who has had a career in Brussels but his full negotiating power seems to have backfired and hence von der Leyen’s decision to be more high profile. We think that the EU will get the 30% tariff reduced by the Aug 1 deadline but that its 10% tariff 'aspiration' may be hard to achieve, especially if Trump disdain for the EU makes him want to make an example of. This also means a higher tariff rate than in the ECB's baseline scenario.
European trade ministers are due to meet in Brussels today, following a Sunday gathering of ambassadors, who strongly supported von der Leyen’s decision to keep a EUR 21 bn retaliation package on the back burner until August 1, although the Commission will also present ministers with a separate list of additional countermeasures targeting roughly EUR 72 billion worth of US exports - "Both packages will be locked and loaded and ready to be used in early August, if negotiations don’t yield an acceptable outcome,” said an EU diplomat.
But if the EU isn’t willing to use the smaller retaliation package now, how credible is the larger threat? And remember, that package – designed as a response to 25% steel and aluminium tariffs – did not change after Trump bumped up those tariffs to 50%, mid-negotiations. Moreover, von der Leyen’s stance papers over divides among EU countries – France has just reiterated a tougher line against the U.S. following the announcement of the tariffs. But it does seem as if the EU’s goal was - and remains - a damage limitation trade agreement that would lock in the 10% reciprocal tariff rate, with sector-specific concessions. The hope is very much that the the latest threat is aimed primarily at negotiating better terms, this very much reflecting Trump trade talk tactics. Business leaders and agricultural groups have also lobbied against tariff measures that could prompt Trump to respond with even higher levies with the majority preferring the ‘certainty’ of fixed tariffs to constant changes. But in private, it does seem as if EU governments will endorse the commission’s cautious moves and instead hope that bond and stock markets come to their aid.
But damage would still be the order of the day. A 10% reciprocal tariff implies a moderate hit to GDP of around 0.3 ppt as opposed to nearer 1 ppt with tariffs of 30% and where downside risks would be clear and elevated, especially as key sectors such as pharmaceuticals remain vulnerable to possible, if not likely, additional targeted measures.